Calculating return based on IT budget savings alone is short-sighted

Cloud computing is right about at the same place today as the Web was in 1997.

"Large potential, a huge market, but at the same time a lot of hype, a lot of uncertainty," said M.R. Rangaswami, co-founder of Sand Hill Group, a consulting firm for software companies, at a conference called Cloud Connect that concluded today in Santa Clara, Calif.

Some of the uncertainty revolves around determining the return-on-investment (ROI) from subscribing to a cloud computing service. Industry experts discussing cloud computing ROI on one panel, including someone from Microsoft, said there are ways to gauge ROI, but there are too many variables to offer a simple answer.

And one panelist, in particular, said if a company only calculates ROI based on savings to the IT budget, they're thinking too small.

Microsoft has an online calculator for determining ROI as well as total cost of ownership (TCO) of deploying its new Windows Azure Platform for doing enterprise computing in the cloud, said Dianne O'Brien, senior director of business strategy for Windows Azure.

But a company could be wasting money if it puts applications in the cloud that are better left in the data center. Whether an application is suited for a cloud environment depends on how it behaves, O'Brien said, and then described four cloud-suited application types.

Type one is the "On and Off" application. These are apps that might run feverishly for an hour or so and then shut down. Every night when someone closes a restaurant or other retail store, they do "batch processing," transmitting all the day's credit card receipts to the card processing company. That's a perfect example of an "On and Off" application.

"During the day that hard drive is idle," O'Brien noted. "That’s a lot of capacity that you have sitting around with a lot of idle time."

Type two is the "Growing Fast" type. A social networking site that finally takes off needs a bunch of compute cycles quickly, she said.

"If you’re having to deal with bringing that new infrastructure on line at the same time you’re growing, that’s a lot of time spent just on the basics and you’re not really focused on the application itself."

Type three is the "Unpredictable Burst." A site could be humming along just fine until it gets a mention on "The Huffington Post" blog or the "Larry King Live" show on CNN and everyone rushes to visit. Again, that's where it'd be nice to have excess capacity available in the cloud without having to build it in your own data center.

The fourth type is the "Predictable Burst," such as the online retailer whose unique visitor numbers shoot up every year between Thanksgiving and Dec. 25.

"How quickly can you respond, how quickly can you bring new capacity online when you need it?" O'Brien said, listing some of the questions IT people should ask before making an investment in the cloud.

But Steve Oberlin said if you only ask "How much can cloud computing save me on my IT budget?" you're asking the wrong question.

Oberlin, a vice president and distinguished engineer at CA, noted that IT budgets are equal to only about 2 percent to 4 percent of a company's revenue, on average. He's seen metrics that measure the cloud ROI based on server reduction, savings on new server provisioning, reduced operating expenses and the payback period from new IT spending.

"But really if you think about it, if you think about the limits to savings, you’re limited to the size of your IT budget," Oberlin said.

This might be harder to calculate, but what he's saying is that the ROI on cloud computing, like the ROI on IT spending in general, is determined by how much more agile the company can be, how much quicker it can bring products to market and how much sooner it can launch other initiatives to bring in more revenue and generate more profit.